The Federal Reserve Bank of Minneapolis has released a paper advocating for a potential ban or taxation of Bitcoin, asserting that such measures are necessary to sustain primary deficits. Published on October 17, the working paper proposes that governments may need to prohibit Bitcoin trading or implement a tax on the cryptocurrency to uphold their permanent primary deficits.
The paper, titled “Unique Implementation of Permanent Primary Deficits?” by researchers Amol Amol and Erzo G.J. Luttmer, argues that a legal ban on Bitcoin could facilitate the enforcement of permanent primary deficits. The abstract states, “A legal prohibition against Bitcoin can restore unique implementation of permanent primary deficits, and so can a tax on Bitcoin at the rate.”
Within its 40 pages, the paper characterizes Bitcoin as a “balanced budget trap,” a situation where governments must adhere to a balanced budget due to Bitcoin’s decentralization. The Fed contends that Bitcoin poses a challenge to effective policy implementation, particularly for governments seeking to maintain permanent deficits through nominal debt.
The researchers label Bitcoin as a fixed-supply “private-sector security” that lacks “real resource claims.” As a remedy to this perceived issue, they advocate for either a prohibition or taxation of Bitcoin.
Matthew Sigel, head of digital asset research at VanEck, criticized the working paper, describing it as an “attack on Bitcoin.” Sigel interpreted the paper as indicating that governments could sustain permanent deficits if consumers remain unaware of and do not adopt new forms of currency like Bitcoin. He referenced a critique from Bitcoin analyst Tuur Demeester, who condemned an October 12 research paper by the European Central Bank that suggested older Bitcoin holders profit from newer investors, recommending regulation or outright prohibition of Bitcoin.
In a post on October 21, Sigel stated, “[The paper] fantasizes about ‘Legal Prohibition’ and extra taxes on BTC to ensure government debt remains ‘Only Risk-Free Security.’”
A primary deficit occurs when a government spends more than it collects in taxes and other revenues, and the term “permanent” indicates a sustained intention to exceed its budgetary constraints.
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